Capital gains are not taxed until the property is actually transferred in accordance with the agreement

Facts and Issue of the Case

The facts of the case as noted by the Ld. CIT(A) is that the AO noticed that during the year, the assessee jointly with his two (2) brothers, viz Shri Formal Dedrajmali alias Sainik/Siani and Shri Kailash Dedraj Mali alias Sainik/Saini, entered into sale Cum Development Agreement on 21.10.2010 with the Developer cum Purchasers, viz. Bhupatbhai Ravjibhai Lukhi and Shri rameshhai Ravjibhai Lukhi, for transfer of their ancestral property being Plot No. 135, bearing CTS No. 97-A-29/1 and 97A-29 of village Chincholi, admeasuring 1053 square yards equivalent to 880.31 square meters together with the construction existing there on. And that all the three brothers had equal undivided share in the said property. And as consideration for transfer of his share in the aforesaid property, Shri Kailash Dedraj Mali alias sainik/Saini agreed to transfer/sell his 1/3rd right, title and interest in the said property for a consideration of Rs. 1,90,00,000/-. However, for transfer of their respective rights, title, the assessee and Shri Tormal Dedraj Mali alias Sainik Saini jointly received Rs. 70 Lac and a right in the house property of 5000 sq. feet built up area wall to wall cost fully developed constructed flats without any obligation in the projects to be constructed by the developer at the Plot No. 135, mentioned above. Accordingly, consideration received by the assessee for transfer of his 1/3rd right, title and interest in the said property was Rs. 36 Lac and a right in the house property of Rs. 2,500/sq. feet built up area wall to wall flat. Taking note of the aforesaid facts, the AO noticed that the assessee has not offered any capital gains in his return of income for A.Y. 2011-.

Therefore, the AO issued show cause notice to the assessee as to why the LTCG in respect of property may not be taxed in the hands of the assessee in this relevant AY 2011-12. The assessee in response brought to the notice of AO that there was an agreement dated 20.10.2010 which was executed by the assessee (Vendor no. 3) along with his two brothers (Vendor no. 1 and Vendor no. 2) each having 1/3rd share in the property (ancestral property being Residential Bungalow) with the Developer cum Purchasers (Bhupatbhai Lukhi & Rameshbhai Lukhi). According to the assessee, the transfer of the property/their 1/3rd share in the property did not take place in the assessment year under consideration. And therefore it was pleaded that neither any capital gain arose this year nor it could be taxed in this year. However, the AO did not agree with the contention of the assessee and according to him, the transfer [of immovable property] has taken place, since the developer has been given possession of the property, so by virtue of Section 53A of transfer of property Act, tranfer has taken place. Therefore, as per AO since the incident of tax (transfer of capital asset) having taken place, the assessee was bound to offer the capital gain on it. Aggrieved by the aforesaid action of the AO computing the long term capital gain (LTCG) of Rs.1,05,37,002/-. Aggrieved by the aforesaid action of the Ld. CIT(A), the assessee is before us.

Observation by the Court

The court had heard both the parties and perused the records. The short point to be decided is whether in the facts and circumstances of the case whether the incident of tax for charging capital gain has arisen in this year (AY. 2011- 12) against the assessee or not. The AO’s case is that since the assessee has executed an agreement dated 20.10.2010 with the developer cum purchaser and having received Rs.35 Lakhs, the assessee has transferred the land in question. And therefore he is bound to have offered the capital gain for the transfer of his share of land. However, the assessee’s contention is that based on the agreement executed by the assessee with the developer cum purchasers, the incident of tax has not taken place in this relevant assessment year. And therefore no capital gain could have been charged in this assessment year from him. For adjudicating this issue, the court need to look into the certain relevant provisions.

In the light of the above agreement and the relevant law (supra), we have to examine the impugned action of Ld. CIT(A). According to AO/Ld. CIT(A) since the possession of land has been handed over by the assessee to the developer on execution of the agreement dated 20.10.2010, the transfer of property have taken place in view of the Section 2(47) (v) of the Act r.w. Section 53A of the Transfer of Property Act, 1882. In this regard, the Ld. Counsel for the assessee contended that on perusal of the agreement executed by the assessee with the developer would reveal that there was no transfer of a capital assets in view of the provisions of Section 2(47) (v) of the Act r.w. Section 53A of the TOPA. According to him, in order to attract provisions of Section 53A of the TOPA, first and foremost, the transferee must, in part performance of the contract, have taken possession of the property or any part thereof. Secondly, the transferee must have performed or be willing to perform his part of the agreement. It is only when these two important conditions, among others, are satisfied that the provisions of Section 53A of the TOPA can be said to be attracted on the facts of a given case and referred to the decision of the Hon’ble Supreme Court in the case of Seshasayee Steels Pvt. Ltd. Civil Appeal .

Having perused the sale-cum-developments agreement dated 20.10.2010 it is noted that as per the terms of the ibid agreement, the assessee shall hand over physical possession of the property to the purchaser cum developer after the purchaser cum developer obtain IOD (i.e. Intimation of Disapproval) from the competent authority for the purpose of development. IOD has to be issued by the local authority Municipal Corporation of Greater Mumbai (MCGM). As per the agreement, the assessee only has to hand over possession of the immovable property in the event the transferee obtains the IOD from the MCGM. So it is noted that the possession of property to transferee will be only after he obtains the IOD from MCGM and in this case, the IOD (the intimation of disapproval) was undisputedly issued by the MCGM only on 15.04.2013 (i.e. in AY. 2014-15). Thereafter only assessee need to hand over the vacant and peaceful possession of the property to the transferee/developer i.e, only on or after 15.04.2013. Thus, it is seen that AO/Ld. CIT(A) erred in assuming that assessee by virtue of the sale-cum-development agreement dated 20.10.2010 has handed over/allowed the transferee to take possession of the immovable property and thus erroneously held that section 53A of TOPA read with section 2(47)(v) of the Act stood attracted.

Thus the court note that AO/Ld. CIT(A) mis-interpreted the agreement dated 20.10.2010 and applied the law erroneously, so their impugned action cannot be sustained. Having held so, the court further note that there was no evidence/material before AO/LD CIT(A) to suggest that the assessee has given possession of the property to the developer before the IOD was issued by the MCGM and any way that is not the case of AO/Ld. CIT(A). In this regard, the court note that assessee has produced evidence to substantiate that he had not vacated the house in the immovable property till IOD was issued by MCGM. For that he has has filed the Electricity Bill in the name of assessee (Mahesh Saini) for the month of April 2011- June 2011, April-2012 – June 2012 found placed P.B-III and Property Tax Bill issued by BMC in the name of Mother of assessee Smt. Parvati Devi of Property No. 1481 & 1482 upto 28.12.2012 (Receipt dated 04.05.2012) found placed of the P.B-III. In the light of the facts discussed supra, the court find that there was no transfer of immovable property, so no capital gain could have been taxed in the hands of the assessee in this assessment year, therefore, the assessee succeeds.